Highlights

• EIs clarified. During yesterday’s analyst briefing, management clarified on 3 key exceptional items during the quarter: (i) fair value gain on Paradigm JB of RM224m; (ii) impairment of receivables related to its MOI job in Qatar of RM165m; and (iii) fair value loss on Paradigm PJ of RM23m. After adjusting for these EIs, we estimate FY17 core earnings to stand at RM139m (+39% YoY), which is within both our and consensus expectations.

• Further impairments unlikely. Management shared that it has fully impaired all receivables related to the Ministry of Interior (MOI) building job in Qatar which has been completed. For its ongoing Lusail project in Qatar (RM847m) which is c.50% completed, management shared that payment from its client has been prompt and does not foresee any impairments related to the job. Going forward, WCT will not actively bid for jobs in the Middle East and will focus domestically in Malaysia.

• Job wins to sustain. Management guided for RM2bn in new job wins for FY18 (FY17: RM1.9bn). WCT has submitted tenders in excess of RM2.8bn (infra: RM1.7bn and buildings: RM1.1bn). For infra jobs, it is eyeing on (i) remaining packages of the West Coast Expressway; and (ii) Pan Borneo Sabah where WCT has a wholly owned Sabah subsidiary, enabling it to bid as a “local Sabahan” contractor.

• Focus on clearing inventories. WCT achieved RM305m property sales in FY17, below its initial target of RM500m and our assumption of RM350m. Unbilled sales stood at RM230m, or 0.5x FY17 property revenue. For FY18, its focus will remain on clearing its inventories (totalling RM550m) and is targeting for RM300m in sales.

• Update on de-gearing plans. Most of WCT’s de-gearing plans remain on track: (i) 10% share placement in 1H18 to raise RM224m; (ii) clearing property inventories; and (iii) SPA for 2 parcels of land in Sg Buaya and 1 in Klang totalling RM116m has been signed. However, its proposed REIT listing has been delayed due to the ongoing legal suit by AEON on the BBT Mall.

Risks

• High net gearing at 88%.

Forecasts

• We cut FY18-19 earnings by 2% and 6% attributable to lower property sales assumptions, in line with management’s guidance.

Rating

Maintain BUY, TP: RM2.27

• Albeit with a cautious stance, we are turning positive on WCT given its improving core results and de-gearing initiatives as brought forth by its new management team.

Valuation

• Our SOP based TP is lowered from RM2.29 to RM2.27 following our earnings cut. This implies FY18-19 P/E of 20.3x and 18.6x respectively. While this appears on the high side, WCT has significant surplus land value (i.e. market value less BV), backing 70% of its market capitalisation.

Source: Hong Leong Investment Bank Research - 28 Feb 2018